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It’s a mark of how complicated life has become that we eagerly grasp at rules of thumb to help us make everyday decisions. However, rules of thumb — especially financial ones — tend to be blanket recommendations that fail to take into account the vast differences in our lives. Trying to follow them can result in frustration, a sense of failure and, in the worst cases, disaster.

Here are five of my favourite misleading financial rules of thumb.

1. Buy and hold is the best approach.

B&H is one of the basic axioms of the investment industry. On one hand, it steers people away from jumping in and out of investments with every stock market hiccup. On the other hand, if a stock or mutual fund is a dog, it will keep barking no matter how long you hold it. Far better to let the dog out and redirect your money into better quality stocks or mutual funds.

The mutual fund industry loves B & H because it encourages investors to hang on, whether they have good investments or bad. All the while management fees (MERs) are collected regardless of the quality of the fund. Also, B&H keeps most people from carefully scrutinizing the quality of their investments — they just keep buying them hoping they’ve been steered into the right ones.

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A better rule would be: Buy, hold and monitor.

Evaluate your holdings annually. If you notice long-term yipping and howling, show that pooch the door.

2. If you’re young, you can afford to take risks.

Those who start investing early can be conservative and still reach their goals. That is, of course, if you religiously reinvest dividends and interest income, a practice that allows the miracle of compounding to increase your rate of return over time.

Morningstar’s Andex Charts back this up with a comparison of a risky sample portfolio (80 per cent in equities) with a conservative sample portfolio (80 per cent in GICs and bonds). The safer one actually slightly outperforms the riskier one over 30 years — 10.8 per cent on an annual average basis versus 10.2 per cent. And the conservative portfolio has far less chance of loss at any given time than the riskier one.

Why would a young person want to take on more risk if there is no reward down the road?

Here’s a better rule: If you’re a young investor, you don’t need to take risks.

3. Invest your age

This is a favourite rule in the financial planning field. When you subtract your age from 100 that is how much you should have invested in stocks or equity mutual funds. So a 60-year-old should have 40 per cent in the stock market and 60 per cent in fixed income (cash and bonds). A 30-year-old should have 70 per cent in the stock market and 30 in fixed income.

However, this guideline doesn’t take into account a person’s situation or temperament.

Moshe Milevsky, associate professor of finance at York University, once told me he doesn’t invest in bonds because “I am a bond.” He was describing his situation. His defined benefit pension plan effectively functions as a bond giving him a guaranteed income on retirement. In Milevsky’s case, “invest your age” is meaningless.

In contrast, a 25-year-old who has absolutely no stomach for risk might be well served by investing mostly in GICs and bonds.

A more appropriate rule of thumb would be: Invest according to your situation and temperament.

4. Retirement income should equal 70 to 80 per cent of working income

Author Margie Taylor’s recently published and hilarious book, 60 is the new 20: A boomer’s guide to aging with grace, dignity and what’s left of your self-respect, makes it clear that there is no one-size-fits-all for the boomer generation. Those who are either at or near retirement are far from a homogeneous group and vast differences demand more individual specific planning.

Someone in a small town with inexpensive housing might be fine with 50 per cent of working income. But if you live in a high tax urban neighbourhood with three large dogs, a boat and a cottage, 85 per cent could be more appropriate.

A better guide would be this: Target your retirement income according to your health, energy, goals, hobbies and where you expect to be living upon retirement.

5. Save 10 per cent of your gross income

Yes, it has a nice ring to it, but it could be unrealistic for one-income families. On the other hand, a high-earning, single person with no car and low housing costs could certainly save far more. Also, there may be times in your life when paying down a mortgage, student loan and other debt makes more sense than setting aside savings in a Tax Free Savings Account or RRSP.

A more reasonable rule of thumb might be: Aim to save 10 per cent of gross income but adjust it according to your stage of life.

I’m not suggesting all financial guidelines should be tossed out the window. Consider them, but take into account the realities of your own situation.

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